Consumer Weakness and U.S. Recession Could Fuel Precious Metal Surge

EDITOR'S NOTE: Amidst shifting economic winds, the path of gold and silver gleams with possibility. According to a report from Heraeus, the pendulum of gold's allure swings in tandem with the resilience of U.S. consumers, poised to push the precious metal skyward in the face of a potential recession. While an upturn in the U.S. economy may have dimmed gold's immediate appeal, Heraeus underscores that consumers' faltering could rekindle its shine. Meanwhile, silver, bolstered by growing anticipation of Chinese stimulus to mend its economy, is surging. With the tale of gold and silver interwoven with consumer sentiment and global economic dynamics, the intricate dance of these precious metals continues to captivate investors' attention.

The improving economic outlook for the United States has made gold less appealing to investors, but weakness in U.S. consumers could still tip the country into recession and boost the precious metal, while Chinese stimulus should support silver demand, according to the latest precious metals report from Heraeus.

“Earlier in the year a recession was anticipated, and therefore, the Fed was expected to stop hiking interest rates and start cutting them,” the analysts wrote. “The gold price gained as the dollar weakened and bond yields fell back, coming close to its all-time high. Now, the Fed’s view is that there will not be a recession.”

The analysts said that with core inflation remaining sticky, they believe the Fed is likely to maintain a ‘higher for longer’ policy regarding interest rates, and may even choose to raise them further. “This has helped the dollar strengthen and seen the gold price slip below $1,900/oz,” they wrote. “However, even though real interest rates are now positive and bond yields are at the highest level since 2007, the gold price has held up relatively well.”

In the near term, Heraeus sees the strong U.S. dollar as a significant headwind for gold. “Interest rate futures now imply a 40% chance of a further rate rise by the end of the year, when not so long ago the next move was expected to be a rate cut,” they said. “Additionally, speculative positions in foreign exchange futures are very short the US dollar at a level that historically has seen a reversal and the dollar strengthen.”

Consumers could crater U.S. economy

But all bets are off if consumers lose their surprising resilience, as they seemed to do according to the Conference Board’s latest Consumer Confidence report released on Tuesday morning. “[I]f the US consumer falters, a recession would occur and the gold price could rebound,” they wrote.

Even though GDP and employment data have indicated that the U.S, economy is on firm footing, the analysts noted weakness in other areas. “The ISM manufacturing PMI was below 50 (i.e. activity was declining) for a ninth straight month in July and industrial production contracted in May, June and July,” they said. “The services side of the economy is holding up, but bank lending standards are being tightened and with interest rates on loans now much higher, consumer spending is likely to slow.”

“If consumer spending shrinks, a recession becomes almost inevitable and that would result in falling bond yields, interest rate cuts, declining real interest rates and a weaker dollar which would be positive for gold,” they said.

Gold ETF holdings continue to slide

Looking at the precious metals markets, the analysts noted that gold ETF holdings have continued to decline. “Global ETF outflows have totaled 1.39 moz (million ounces) in August alone, taking holdings to below 90 moz and the lowest level since March 2020, they wrote. “Investors have been liquidating their positions, as the gold price fell from $1,978/oz in mid-July to $1,890/ oz a month later in August.”

They speculated that gold investors may be waiting until they’re certain that U.S. interest rates have peaked, “which since 2000 have preceded gold price rallies.”

Chinese stimulus will buoy silver prices

Turning to silver, they noted its nearly 6% rally last week, and said that the weakening Chinese economy should actually favor demand for the gray metal. “Growing expectations that China will have to implement further stimulus to bolster its economy are supporting industrial metals prices,” they wrote, also noting copper’s 3.7% increase and nickel’s 4.9% rally in recent weeks.

“To date, economic stimulus in China following the relaxation of Covid restrictions has been relatively limited, with little direct intervention,” they said. “More cracks are beginning to show in the Chinese housing market, adding to hopes of greater and more impactful measures, particularly in the industrial sector.”

As for investment demand, Heraeus noted that silver and gold investors have moved together in August. “Silver-backed bullion ETFs have seen global holdings decline by more than 4 moz in August so far,” they said. “Outside of silver funds, non-commercial traders have been unwinding long positions in silver. The net long position has fallen from 219 moz in July to 39 moz as of 22 August.”

Originally published by Ernest Hoffman at Kitco